Investing in a lawsuit

If buying shares in order to bet on a company’s financial performance doesn’t provide enough of a kick, try buying shares to bet on the outcome of a lawsuit.
Investors who want to take such a risk may consider the initial public offering from VR Holdings Inc. of Linthicum, Md., which is expected soon.
As reported in InvestmentNews in November, VR Holdings is a private holding company whose sole asset is a 13-year-old lawsuit. The company is planning to merge with IJJ Corp. (IJJP.PK), a Capital Heights, Md.-based shell company that used to provide information technology services to federal, state and local governments.
The merger is seen as a more efficient alternative to going through the process of listing VR Holdings as an over-the-counter stock, which was the original plan.
The stock-for-stock deal, which could close this month, is designed to provide liquidity for more than 2,500 claimants, 2,000 of whom are over age 65 and are concerned they may not live to see the suit settled.
The lawsuit, which involves racketeering charges against a half dozen hedge funds and money managers, is still awaiting a court date.
Because so much still hangs in the balance, potential investors should approach this situation with their eyes wide open.
It was almost a year ago that the U.S. District Court for the Northern District of Illinois dismissed the case, based on the expiration of a four-year statute of limitations.
The claimants are challenging the dismissal.
According to the claimants, the lawsuit issue boils down to how and why a six-month $23 million bridge loan made in 1996 by some of the money management firm defendants was allowed to lapse, giving lenders an 80% ownership stake in the company.
Morton Lapides, a 79-year-old plaintiff in the case, said his company, MML Inc. of Baltimore, was brought down in the “domino effect” of the failure of all four of its subsidiaries through the financing structure.
Mr. Lapides, a cancer patient, is participating in the two-pronged charge to get the case before a judge and provide some liquidity for the claimants.
The merger deal is expected to create approximately 550 million shares, which breaks down to about one share for every $13.50 worth of lawsuit claim.
The shares — which will be issued to claimants, minus a 50-million share dilution to accommodate the merger — will start trading in the range of $1 or less.
“We’re taking a 10% dilution to save the time and money of going through the whole filing process,” said Mr. Lapides. “IJJ Corp. will increase their authorized shares, and they will offer us one share for every share we would have outstanding.”
Quirky as it might seem, the general structure is not without some precedent.
As Mr. Lapides pointed out, during the savings and loan crisis 20 years ago, there were a few thrifts that folded lawsuit claims into their equity offerings.
But this is believed to be the first time a company’s sole asset is identified as a legal settlement.
For investors, the appeal is expected to be the potential return from a successful lawsuit or settlement.
Based on the projected total size of the lawsuit and $1 initial trading range of the shares, the ultimate return could exceed 1,200% — or it could be considerably less.
It is almost impossible to determine at this point when that final payout would likely arrive or what it might ultimately look like.
But assuming the claimants do get their desired level of liquidity, there is always the chance that the shares could eventually trade almost like futures contracts in which the price would fluctuate based on new information related to the projected outcome of the lawsuit.